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Private Equity Briefcase

By Kelly Holman, IDD Magazine

January 23, 2009

Luxury Out Of Fashion

Remember the retail investments made over the last several years by a slew of private equity firms including Apollo Management, Bain Capital, Leonard Green & Partners, Sun Capital Partners, TPG and Warburg Pincus?

Transactions that married high-finance investment firms with household-name companies like Neiman Marcus, for instance, couldn’t have been more interesting to read or write about. Whether it involved pizza chains, pet product stores or glitzy apparel sellers, the retail sector was red-hot.

Even investments in apparel, long eschewed by most buyout firms for posing considerable “fashion risk,” became popular. It seemed few leveraged buyout executives were worried about the possibility of a recession or the long-term picture for consumer sentiment.

So, when Dubai private equity firm Istithmar acquired luxury retailer Barneys New York from Jones Apparel Group for $942.3 million in 2007, the sale wasn’t exactly viewed as all that unusual. Back then, the luxury sector was viewed in the same light as the latest buzzword sweeping the investment community—“bulletproof.”

Some investment firms, for example, Investcorp (Investcorp owns SourceMedia, the parent company of IDD), did pretty well with investments in companies like Tiffany & Co. and Gucci years before.

It was only natural that some financial sponsors sought to replicate the success of earlier investors in luxury when the outlook for private equity-driven M&A couldn’t have looked brighter. But, as McGladrey Capital Markets M&A veteran Paul Weisbrich recently pointed out to this IDD reporter, nothing is 100% bulletproof.

The retail sector, it turns out, isn’t different.

Neiman Marcus—the Dallas chain acquired by TPG and Warburg Pincus for $5.1 billion in 2005—and its affiliated Fifth Avenue operation Bergdorf Goodman have begun laying off employees in response to the downdraft in consumer spending.

Some observers think this year could yield a slew of retail bankruptcies.

If new press reports about Barneys offer any indication, Istithmar seems to have got the drift of where luxury is heading: down the tubes. The Middle Eastern private equity firm is said to be mulling over the sale of the retailer, for which it paid an additional $117 million more than its original offer in order to ride the luxury wave.

Too bad it’s about to be overtaken by a tsunami.

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3 Comments

tTGGDN

Posted by: lymanknap l | August 6, 2010 9:26 AM

uaxmpx

Posted by: folcklord f | July 19, 2010 11:09 AM

Well, the article is a bit messy. Talking about Retailers and Luxury. No doubt high street retailers have been suffering heaps, nevertheless Luxury does not seem that affected at least in some sectors, i.e. Property, Super Cars, Yachting, to mention the business we are involved in. Flows in Wealth Management have been drying out. However, after being forced to take losses and to be extra cautious when playing the capital markets, the rich and the super rich need, more than ever, to firmly protect at least one life aspect where to assert their nature of .... rich and super rich! Furthermore, what’s the point of being considered rich if you start reducing vacations and related spending? Crumbs! Might as well be a middle class, then! Reason why there are still many new resorts opening in ‘09/’10. No doubt all businesses have been hit by the global crisis, but the adamant rich is finding a way to defend status symbols accepting a concept that, till recently, they snottily considered good just for the lower middle class. I am referring to the increase of fractional property schemes, applied to various luxury goods, like vacation properties, yachts, private jets, super cars. Spending behaviors can sometimes be rather resilient! RHC

Posted by: Ruggero H. C | June 29, 2009 5:42 PM

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Kelly Holman

Kelly Holman is the assistant managing editor at Investment Dealers' Digest, where he writes about private equity and leveraged finance. Prior to joining IDD, he reported on leveraged buyout transactions, private equity fundraising activity, corporate auctions, the middle market and credit markets as a senior writer for The Deal. Before joining The Deal in 2000, Holman was a reporter for PRWeek magazine, where he reported on financial services PR and investor relation activities, as well as international PR developments. He also assisted with Haymarket Media Group's US launch of the public relations trade magazine. Previous to PRWeek, Holman wrote about private equity for Private Equity Week and Buyouts and served as a contributor to IDD in the late 1990's. A Colorado transplant, Holman has called New York home for more than a decade. He received his B.A. in Mass Communications from the University of Colorado at Denver..

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